(Co-author: María Santana)
The Spanish Parliament finally adopted Law 11/2021 of July 9th on Measures to Prevent and Combat Tax Fraud (“Law 11/2021”), which covers several aspects of Council Directive (EU) 2016/1164 of July 12, 2016 (so-called “ATAD”) and also contains other relevant changes to Spanish tax legislation to prevent tax fraud and strengthen tax control. These changes include the change to the CFC rules, the Exit Tax, the SOCIMI and SICAV special tax regulations, the tax base for real estate transfer tax and the stamp tax on the acquisition of real estate in Spain, the replacement of the concept of “tax havens” with “non-cooperative Jurisdictions ”etc. Law 11/2021 was published in the Spanish Official Gazette on July 10th, 2021 and entered into force on July 11th, 2021, unless otherwise specified for certain specific measures. In this note we summarize the main tax changes that we believe should be considered by foreign investors with existing investments in Spain or planning to invest in Spain.
introduction
The Spanish Parliament finally adopted Law 11/2021 of July 9th on Measures to Prevent and Combat Tax Fraud (“Law 11/2021”), which covers several aspects of Council Directive (EU) 2016/1164 of July 12, 2016 (so-called “ATAD”) and also contains other relevant changes to Spanish tax legislation to prevent tax fraud and strengthen tax control.
Law 11/2021 was published in the Spanish Official Gazette on July 10, 2021 and entered into force on July 11, 2021, unless otherwise specified for certain measures.
In this memo we summarize the main tax changes that we believe should be considered by foreign investors with existing investments in Spain or planning to invest in Spain, but this is not an exhaustive review of all the changes introduced by Law 11/2021.
CIT: Implementation of ATAD measures
Law 11/2021 implements two aspects of the ATAD, the "Controlled Foreign Company (CFC) Rule" and the so-called "Exit Tax". Other aspects of ATAD such as the “interest cap rule” 1 and the “hybrid mismatches” will be implemented at a later stage and the “general anti-abuse rule” does not need to be implemented as Spanish tax legislation is already abusing tax rules.
Law 11/2021 implements two aspects of the ATAD, the "Controlled Foreign Company (CFC) Rule" and the so-called "Exit Tax". Other aspects of ATAD such as the "interest cap rule" and the "hybrid mismatches" will be implemented at a later stage and the "general anti-abuse rule" does not need to be implemented as Spanish tax legislation already provides anti-abuse tax rules.
Rule for Controlled Foreign Companies ("CFC")
Spanish corporation tax ("CIT“The law already has a CFC regulation, but Law 11/2021 introduces several changes from January 1st, 2021 as requested by ATAD:
- Dividends and capital gains from foreign holding companies are now subject to the "passive income" imputation rule
Until Law 11/2021, the Spanish CFC regulation explicitly exempted dividends and capital gains made by foreign holding companies from ≥5% stakes in subsidiaries of the second tier from the “passive income” imputation rule if the foreign holding company of the (first Level) has met certain requirements.
Law 11/2021 repeals this exemption from January 1st, 2021 and if we do this together with the recent amendment to the Spanish participation exemption from January 1st, 2021 (i.e. the exemption has been reduced from 100% to 95% of dividends and capital) Profits, this implies an effective tax of 1.25% in Spain), it means that Spanish companies may be required under CFC rules to recognize an amount equal to 5% of the dividends and profits made by foreign holding companies, if these dividends or Profits were completely tax-free in that territory (or not taxable under a territorial tax system) and were therefore subject to a tax rate of less than 75% of the Spanish CIT (1.25%) that would have been equivalent to that income2 (which is the threshold for the CFC- Rules apply).
Therefore, Spanish companies that own foreign holding companies should consider whether they are affected by this change or can benefit from any of the CFC exemptions.
- New categories of "passive income"
Law 11/2021 contains in the Spanish CFC regulation additional categories of “passive income” as indicated in ATAD, such as income from finance leasing and from insurance, banking and other financial activities, except when this income is related to the foreign subsidiary with a business activity and income from the sale of goods and services bought from and sold to related parties (as defined in Article 18 of the Spanish CIT Law), if the foreign subsidiary contributes little or no economic value.
- Scope of the CFC rules extended to operating sites
Permanent Establishments ("PEs") outside of Spain are now within the scope of the Spanish CFC rules and therefore Spanish companies must include the passive income generated by their PEs (with no option to apply the PE Income Exemption) when the Permanent Establishment achieves " passive income ”and is subject to tax in its territory of less than 75% of the Spanish CIT that would have corresponded to such income.
- The escape clause from the CFC rules is relaxed
So far, the Spanish CFC rules do not apply if the foreign company is resident for tax purposes in another EU member state and the taxpayer proves that this EU company was founded for good business reasons and carries on business activity.
Law 11/2021 extends the scope of this escape clause to permanent establishments based in another EU member state and to companies / permanent establishments in the European Economic Area (EEA) from business activities (ie the requirement of “good business reasons” is no longer required).
Exit tax
The Spanish CIT law already provides for an exit tax when a Spanish company moves its tax residence to another Member State or to a third country, with the exception of the assets that remain effectively linked to a permanent establishment in Spain. Currently, Spanish CIT law allows exit tax payments to be deferred when transferring tax residence to another EU or EEA area until the assets are transferred to a third party.
With effect from January 1, 2021, law 11/2021 replaces the above-mentioned tax deferral with the tax deferral regulation provided for in ATAD, which makes it possible to pay the exit tax by paying in installments over five years with the full tax debt due in certain cases (e.g. Transfer of assets to a third party or to a third country, etc.).
Law 11/2021, based on ATAD, also clarifies that, in the event of the transfer of the tax residence of companies, assets or businesses of a permanent establishment that are subject to exit tax in the other home Member State, the value determined by that Member State as the initial value of the Accept assets for Spanish CIT purposes (unless this does not reflect their market value).
CIT: special tax systems
SOCIMI (Spanish REITs): 15% tax on undistributed profits
One of the requirements of SOCIMI is the mandatory annual distribution of at least 80% of the distributable book profit of SOCIMI (with certain exceptions).
Law 11/2021 contains the following amendments to the SOCIMI law, which will come into effect for tax periods from January 1, 2021:
- SOCIMIs are subject to a special CIT of 15% on the undistributed book profits. This 15% CIT does not apply to the part of the book profit that is subject to 25% CIT (d book profits from the sale of a qualifying asset or a qualifying participation may only be distributed at 50%, provided that the remaining 50% are paid within a period of 3 Reinvested in a qualifying asset / interest);
- This 15% CIT will be paid within 2 months after approval of the distribution of the invoice result by the general meeting. Since this new regulation comes into force for tax periods from January 1, 2021, it affects the distributions to be made in 2022 from the profits of 2021; and
- Additional information requirements that must be included in SOCIMI's financial statements in order to keep track of SOCIMI's profits.
This change will be taken into account when deciding on the amount of the dividend that will be paid in June 2022 from the profit for the 2021 financial year. If SOCIMI has not made a book profit in 2021 or has made a book profit but distributes 100% of the distributable book profit, then this new CIT of 15% does not apply.
SICAVs
SICAVs regulated by Law 35/2003 on Undertakings for Collective Investment, which implements the UCITS Directive, can benefit from a CIT rate of 1% as long as they have at least 100 shareholders.
- Stricter requirements to benefit from the 1% CIT rate
Law 11/2021 amends the Spanish CIT law and reinforces this requirement with effect from tax periods starting January 1, 2022 by stating3:
- Only shareholders who own shares in a SICAV with a value of ≥ € 2,500 will be considered for the minimum shareholder requirement (which in the case of a SICAV with sub-funds is increased up to € 12,500);
- The minimum shareholder requirement, as defined in the previous paragraph, must be met for at least 3/4 of the tax period; and
- This minimum shareholder requirement can be controlled by the Spanish tax authorities (previously this requirement was only controlled by the Spanish CNMV).
- Transitional arrangement for liquidation (non-compliant) SICAVs
Law 11/2021 contains a temporary tax regime to facilitate the dissolution and liquidation of SICAVs (which do not meet the new requirements) in 2022 without any adverse tax effects. Special:
- These SICAVs will continue to be subject to a CIT of 1% until they are liquidated;
- The liquidation of the SICAV is exempt from 1% capital tax;
- Shareholders of the liquidated SICAV benefit from rollover relief on all capital gains from the liquidation of the SICAV if they reinvest the entire liquidation quota in other collective investment schemes. This implies that the Shares / Shares received by the Shareholder of the reinvested SICAV / Fund will inherit the base tax cost and acquisition date of the Shares of the Dissolved SICAV; and
- The transfer of listed shares owned by the liquidated SICAV is exempt from financial transaction tax, subject to the reinvestment described above.
Income tax from non-residents (with or without permanent establishment in Spain)
Tax Representative
With effect from January 1, 2021, residents of an EU country or an EEA country with tax information exchange are no longer obliged to appoint a tax representative in Spain.
Exit tax
The Spanish Income Tax Act ("NRIT") already includes an exit tax if a permanent establishment of a foreign company ceases to operate or transfers its assets outside of Spain.
Law 11/2021 adds that the exit tax also applies to assets assigned to a permanent establishment that relocates its activity outside Spain and contains in the NRIT the tax deferral rules provided for above in the ATAD for Spanish CITs:
- Exit tax can be paid in installments over five years if the assets or the permanent establishment are transferred to another EU member state or EEA country; and
- Spain accepts the home Member State's value as the starting value of the assets for Spanish CIT purposes (if this does not reflect their market value).
Concept of "tax havens" replaced by "non-cooperative jurisdictions"
Spanish tax legislation currently contains several specific “tax havens” rules aimed at combating tax avoidance, including payments to companies based in countries on the Spanish “tax havens” list and foreign investors entering Spain through the corresponding countries invest in this list of tax havens (e.g. in the ETVE regime and in the special tax regime for venture capital companies).
Law 11/2021 states that the references in Spanish tax legislation to “tax havens” areas (and also to areas with no effective exchange of information and areas with no or low taxation) are now referred to as “non-cooperative jurisdictions”.
The Treasury Department approves the list of “non-cooperative jurisdictions,” which includes jurisdictions, territories and tax breaks based on the following criteria: (i) tax transparency and effective information exchange, (ii) the existence of favorable tax regimes for offshore companies or instruments Facilitating the distribution of profits that do not reflect actual economic activity in these jurisdictions and (iii) the existence of low or no taxation.
This list of "non-cooperative legal systems" is updated taking into account the criteria of the EU Code of Conduct on Business Taxation or the OECD Forum on Harmful Tax Practices, which in practice means a transition to the concept used by the OECD and the EU approximation of the criteria for Classification of these legal systems.
Law 11/2021 clarifies that if a state with a tax treaty with Spain is added to the list of “non-cooperative states”, the tax rules for non-cooperative states also apply to those states, unless this is contrary to the provisions of the double taxation agreement.
Accordingly, references in Spanish tax law to "tax havens", such as in the special tax regime of the ETVE (Entidades de Tenencia de Valores Extranjeros) or in the special tax regime for venture capital companies (entidades de capital riesgo), are considered to be transferred to "non-cooperative jurisdictions".
The Spanish tax authorities have not yet published a list of “non-cooperative jurisdictions”, but it is expected that the current EU list of non-cooperative jurisdictions, updated at least twice a year, will be used as a reference. The EU list was updated in February 2021 and is expected to be revised in October 2021.
Real estate transfer tax / stamp tax: "Reference value" when purchasing real estate
Until now, the assessment basis for real estate transfer tax and stamp tax when purchasing real estate assets was the “real value” of these assets, i.e. the value agreed between the parties, unless the tax office can prove a higher market value. This has led to significant tax disputes.
Law 11/2021, with the pretext of reducing this tax dispute, introduces the concept of “reference value”, which is higher between the parties from the 1st, in which case the latter will be used.
This "reference value" is determined annually by the land registry office ("Catastro Inmobiliario") according to objective criteria on the basis of the prices reported by the notaries for real estate transactions, taking into account the geographical zones and the type of property asset and must not exceed the market value.
In the absence of a “reference value”, the taxable amount will be the higher value agreed by the parties or the market value.
Taxpayers can appeal this "benchmark" if they believe it is higher than market value, but in practice this new concept of "benchmark" will shift the burden of proof as taxpayers will now have to provide evidence that the market value is lower than this reference value, whereas up to now the tax administration has had the burden of proving that the market value is higher than the price agreed by the parties.
VAT grouping
With regard to the specific VAT system, Law 11/2021 clarifies that the parent company of the VAT group is responsible for paying the debts of the VAT group and for the correctness of the compensations and refunds requested by the VAT group, as well as other formal obligations of the VAT group.
Taxation of Individuals
Unit-linked insurance products
The Spanish Income Tax Act ("PIT") provides for a tax deferral scheme for income from unit-linked insurance contracts that meet the requirements of Article 14.2.h and that are only taxed if the insurance benefit is received upon termination of the contract or the surrender of the policy ( as opposed to on an annual basis).
Now, Law 11/2021 adapts the requirements set out in Article 14.2.h) of the PIT Law in order to apply the above tax deferral and stipulates that the unit-linked products invest the premiums in assets that those applicable to insurance companies prudential regulations (i.e. article 89 of Royal Decree 1060/2015 of November 20th).
Exchange Traded Funds ("ETFs")
According to the current PIT law, capital gains from the sale of shares in Spanish ETFs and foreign, harmonized ETFs listed on the Spanish stock exchange are exempt from the tax deferral ("régimen de traspasos") provided for transfers between investment funds.
Law 11/2021 states that from January 1, 2022, capital gains from ETFs of all kinds, regardless of the exchange on which they are listed, will be exempt from this tax deferral regime.
However, Law 11/2021 provides for a transitional arrangement to allow the application of the tax deferral on ETFs not listed on the Spanish stock exchange and purchased before January 1, 2022, provided that the proceeds from the sale are not reinvested in other similar ETFs .
CFC regulation
Changes made by the Spanish CIT law to the Spanish CFC regime are also included in the Spanish PIT law for natural persons resident in Spain who own shares in foreign companies. See section for Spanish CIT above.
Cryptocurrencies and Tax Form 720
Individuals taxable in Spain must report all their assets and rights located outside of Spain to the Spanish Tax Administration annually using Form 720 if certain requirements are met.
Law 11/2021 states that residents of Spain who own cryptocurrencies outside of Spain must report the value of these cryptocurrencies in the Spanish Form 720 if the value of the cryptocurrencies exceeds EUR 50,000.
Gift and inheritance tax
- "Reference value" as the assessment basis for real estate
The "reference value" determined by the land registry office (as described in the section on real estate transfer tax / stamp tax) also serves as the tax base for the properties for calculating gift and inheritance tax.
- All non-residents can benefit from regional tax breaks
Law 11/2021 amends the Gift and Inheritance Tax Act to clarify that all non-resident taxpayers (and not just those resident in EU and EEA jurisdictions) are entitled to the tax breaks approved by the Spanish regions to take law of the Spanish Supreme Court.
Property tax
- "Reference value" as the assessment basis for real estate
The "reference value" determined by the land registry office (as described in the section on real estate transfer tax / stamp tax) also serves as the assessment basis for the properties for calculating wealth tax.
- New evaluation rule for life insurance contracts (unit-linked)
So far, life insurance contracts have only been included in the assessment base for wealth tax if they had a surrender value (valor de rescate) at the time the tax was incurred. Therefore, non-redeemable life insurance products or which had no surrender value at the time they were created (e.g. unit-linked insurance products) are not subject to wealth tax.
Law 11/2021 has introduced a new valuation rule for life insurance contracts, according to which the policyholder in the tax base of the property tax the value of the mathematical provision at the time of formation. As a result, unit-linked insurance products would now be subject to wealth tax even if the policyholder cannot return the policy.
Tax proceedings / litigation
Below is a summary of the key changes related to any tax procedure or tax dispute.
Surcharges for (voluntary) late payment are reduced
So far, a surcharge of 5%, 10% or 15% of the tax liability (without penalties) has been levied for late payment of a tax liability after the voluntary period has expired, but before the tax authority has asserted this tax liability, if the payment is made within 3, 6 or 12 months after the end of the voluntary period, with payment after 12 months a surcharge of 20%.
Law 11/2021 reduces the above surcharges to 1% plus an additional 1% for each month of delay and reduces the surcharge for payment after 12 months to 15% to encourage voluntary regulation by the taxpayer.
These reduced surcharges apply to tax proceedings that were initiated before Law 11/2021 and are still open if the surcharge regulation is more favorable for the taxpayer.
Criminal proceedings
The payment of fines for tax assessments with consent ("actas en konformidad") and for early payment can benefit from reduction percentages. Now, Law 11/2021 is increasing these reduction percentages to encourage early payment of fines and reduce tax disputes: the reduction percentage for tax assessments with consent is increased from 50% to 65% and for early payment from 25% to 40%.
Law 11/2021 also extends the deadline for the initiation of fine proceedings by the tax authorities from three (3) to six (6) months after the conclusion of a tax audit procedure.
Statute of limitations
The 4-year statute of limitations was suspended during the alarm state (almost 80 days) due to COVID-19, which means that taxes that were not statute-barred at the beginning of the alarm state are statute-barred from 4 years + approx. 80 days.
Now, Law 11/2021 clarifies that this extension of the limitation period only applies to taxes with a limitation period that would have expired before July 1, 2021 without this extension, which means that these taxes with a limitation period ending after this date , the usual limitation period of 4 years applies again.
Controls at the taxpayer's place of residence
Law 11/2021 contains relevant changes in relation to the judicial approval procedure required by the Spanish tax authorities to enter the taxpayer's residence as part of a tax audit.
Next Steps
Foreign investors planning to invest in Spain or making existing investments must analyze the changes introduced by the Spanish Anti-Tax Fraud Act in order to properly assess the impact of these new tax measures.
References
1 As Spain already has an interest cap rule and its implementation can therefore be postponed to 2024.
2 Please note that for this minimum tax calculation, withholding taxes of the foreign holding company are calculated on these dividends.
3 This requirement does not apply to hedge funds or "Sociedades de inversion libre"
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